Monday, September 29, 2014

Here's How Occidental Petroleum Is Finally Remaking Its Business

NEW YORK (TheStreet) -- Occidental Petroleum(OXY_)is well on its way towards transforming from a major international energy company into a Texas-focused oil and gas producer.

In the previous quarter, Occidental Petroleum's domestic oil and gas production increased by 3% from the same period a year ago to 464,000 barrels of oil equivalents per day. But the company is focused on increasing production, doubling the number of rigs at its core Permian Basin positions in Texas by 2016.

The shares of Occidental Petroleum, as well as most of its peers such asExxon Mobil(XOM_),Chevron(CVX_),ConocoPhillips(COP_),EOG Resources(EOG_)andAnadarko Petroleum(APC_) dropped last week, partly due to thedeteriorating oil prices. Brent crude dropped to below $100 a barrel, touching 17-month lows on Tuesday, closing at $97.89 a barrel on Friday.

Similarly, U.S. crude oil prices have fallen by 13.7% over the last three months to $92.21 a barrel. Meanwhile, China's National Bureau of Statistics has said that the country's industrial output has expanded at theweakest pacesince the global financial crisis, raising concerns about future oil demand.

Yet, global oil demand is still expected to grow by 1.2 million barrels a day in 2015, an improvement from 0.9 million barrels a day this year, according to the International Energy Agency in arecent report.

For the year to date, Occidental Petroleum's shares have risen by over 3% to $98, trading 12.8 times the company's trailing earnings, which is in line with the price to earnings ratio of most of its aforementioned peers. However, unlike most of them, Occidental Petroleum intends to buy back as much as13% of its stock in the near future, the company said during its second-quarter conference call. Although value hunters might want to wait for the shares to drop furtherbefore buying, stocks like Occidental Petroleum, representing one of the biggest names in the U.S. energy space, are rarely available at a bargain.

Buybacks can have positive impact on a company's earnings per share growth. A drop in the number of shares is going to give a boost to the company's earnings per share, even without any meaningful growth in net income.

Since the third quarter of 2013, Occidental has repurchased 26 million shares for $2.5 billion and it still has another 20.5 million to go under the current buyback program. On top of this, Occidental expects to repurchase 85 million shares by spinning off of its California business and by selling its interest inPlains All American Pipeline(PAA_).

The California businesswill be transformedinto a new publicly traded company, called California Resource Corp., by early next year. Thereby, Occidental will reduce its stake in the business to around 20% and will use the proceeds to buy back around 60 million shares.

The asset sales and spinoffs that are fueling the company's buyback program are a part of Occidental's strategy to minimize its exposure to outside of the U.S. Other oil and gas producers, such asHess Corp(HES_)and Anadarko Petroleum, have also taken similar steps by scaling back international operations and refocusing on core North American assets.

Occidental has failed to find a single buyer for its business in the Middle East, but is now reportedly planningto divest each asset individually. "We continue to make progress on negotiations with our partners and we will reduce our exposure to the region," said company spokesperson Melissa Schoeb.

Occidentalis reportedlyin talks to sell its stake in the Shah natural gas field in United Arab Emirates, valued at $3 billion, to a government-owned investment company. The company declined to comment.

Meanwhile, Occidental will also have the option of reducing its remaining minority interest in California Resource 18 months after the spinoff.

This could be great news for shareholders as these additional divestitures will allow Occidental to continue with its aggressive share repurchase program while drilling for shale oil and gas in the Permian Basin.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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